Thursday, March 19, 2009

And some deep thoughts from Barton Biggs on why it is different this time. The observation is actually not bad, although it does not justify the YTD performance:

Debt deflation cycles are different and global economic activity continues to disappoint already pessimistic expectations. As the data filter in, we estimate that Q4 GDP shrank at a 5.7% rate for the global economy, which is worse than any quarter in the two deep post war recessions of 1974 and 1982. This was driven by the US’s 6.2% decline, Europe’s -5.8% and Japan’s -12%, ably assisted by bungee jumps of -20% to -30% in growth in Taiwan, Korea and Singapore.

We have taken down our estimates of global growth for the next 4 quarters and have pushed out any semblance of recovery well into the second half of the year. If this forecast turns out close to being right, the US economy will have declined 4.0% peak to trough, worse than 1974’s 3.1% decline and 1982’s 2.6%. Note that the prior two recessions only saw declines of 0.5% on average so this would be 8 times worse. The US unemployment rate will most likely peak at 10%, much higher than 2003’s 6.4% and the 7.8% reached in the early 1990’s recession (remembered by the infamous “jobless recovery”). For the global economy, the peak to trough decline will likely be 3% driven by the worst decline in economic activity since WWII for developed economies (-4%) and decline in EM activity (-1.1%),worse than in 1998 (-0.8%). It has become increasingly clear that we are entering entirely uncharted territory. Most of our understanding of modern financial markets is based on the Post War period. Our understanding of the relationships between financial markets and economic factors, such as growth, inflation, monetary and fiscal policy, has also been shaped by the experience and the analysis of the past 50 years.